Dollar-denominated tariffs attract Indian solar power firms to South-East Asia

Given the record-low tariffs and offtake uncertainties in India’s solar energy sector, domestic developers are scouting for opportunities in the immediate neighbourhood and South-East Asia. One attraction: The dollar-denominated electricity tariffs they stand to earn there.

Some countries offer dollar-denominated tariffs in solar project power purchase agreements (PPAs), freeing the developers from foreign exchange risks. This is important given that the cost of finance represents around 70% of the cost of developing a solar project in India.

“Indian developers are looking out for projects in the Asian markets because of the domestic market becoming too competitive and increasing uncertainties. Some of the attractive markets are Bangladesh, which offers dollar-denominated tariff, and Vietnam, where tariffs are linked to the dollar,” said Sunil Jain, chief executive officer of Hero Future Energies Pvt. Ltd.

The company promoted by the Munjal family of Hero Group is planning to put up one large grid-connected solar plant of up to 100 megawatts (MW) capacity in South-East Asia, apart from expanding in Africa and India.

“As far as dollar-based tariffs are concerned, it definitely makes it (projects) safer. It also attracts lower equity investors because they can more accurately forecast dollar return vis-à-vis return in local currency. It makes fundraising easier,” added Varun Jairath, director, investments, Rays Power Infra Pvt. Ltd, which is focussing on projects in South Asia.

Developers have been fretful that electricity distribution companies may not honour PPAs with solar projects awarded at tariffs that were as high as Rs10.95-12.76 per kWh in 2010-11. The tariffs have dropped steeply this year, hitting a new low of Rs2.44 per unit at the auction of 500MW of capacity at the Bhadla solar park in Rajasthan in May. These concerns have been deepened with Andhra Pradesh and Karnataka renegotiating or scrapping PPAs for wind energy projects.

“Seeking re-negotiation of existing renewable energy PPAs by distribution utilities is a very disturbing trend. This, along with backing down of renewable energy generation and inordinate delays in payment, is making investors in the sector very nervous,” said Debasish Mishra, partner at Deloitte Touché Tohmatsu India Llp.

Solar power tariffs have declined sharply because of plunging prices of solar modules. Also, overseas developers with deep pockets have made a bet on the Indian solar space, driven by its scale and their own expectations of a benign interest rate regime.

“Along with expanding our solar projects in the Indian market we are aiming at exploring the solar market in certain countries of SouthEast Asia and particularly the ones neighbouring India,” said Ashish Agrawal, director at Vivaan Solar Pvt. Ltd.

India had earlier explored awarding projects on dollar-denominated tariff but later abandoned the idea.

Experts say the overseas opportunity is no match to what India has to offer.

“Solar programmes in South- and South-East Asian countries are comparatively small, and PPAs and payment security mechanism are still in evolution. Indian investors will show interest, aided by EPCs (engineering, procurement and construction projects) who will offer better terms to build a local presence. But these are no substitute for the larger and well-tested India programme,” said Kameswara Rao, leader of the energy utilities and mining practice at PwC India.

India’s green energy play is expected to grow substantively with the federal policy think-tank NITI Aayog projecting a 597-710 gigawatt (GW) capacity by 2040 in its new draft energy policy. The National Democratic Alliance government has set an ambitious clean energy target of 175GW by 2022. Of this, 100GW is to be generated by solar projects.

“Sponsors should look more closely at the so-called dollar- denominated PPAs. The conditions are often contingent, for example, they may be limited to soft funding from donor organizations, or lack a clear indexation to market exchange rates, and offer little compensation on termination. The risks, on the whole, can stack up higher,” added Rao.